Strong and consistent oversight in accounts payable is essential to deter fraud. The risks increase exponentially when only one person manages invoice receipt, processing, and payment. This is why it’s essential to have checks and balances in place.
While accounts payable fraud risks can never be fully eliminated, businesses can significantly mitigate them through proper oversight. Implementing segregation of duties, following best practices, and using technological tools are key steps to strengthen vulnerable areas in financial management.
Read on to learn more about fraud in accounts payable and the value of outsourcing your AP to a trusted 3rd party.
Common Types of AP Fraud
Awareness of the various accounts payable fraud schemes is the first line of defense. Here’s an in-depth look at some of the most prevalent fraudulent activities you should be on guard against:
False Invoicing: Involves duplicating legitimate invoices, increasing billed amounts, or creating fictitious vendors. The easiest way to deter invoice fraud is to issue purchase orders before buying goods or services. The invoice must match the corresponding purchase order when it is presented for payment. Someone other than the AP staff member should be reviewing and authorizing the purchase orders.
Electronic Payment Tampering: This can range from redirecting legitimate payments to creating unauthorized automatic withdrawals. Implement secure payment systems with encryption and multi-factor authentication to thwart these digital threats. Reconciling bank statements should be performed monthly and by someone who is not responsible for accounts payable or receivable. Many businesses rely on third-party auditors to perform this such as a bookkeeping or accounting firm.
Check Tampering: This could involve altering the payee name and check amount or reissuing old checks. Regularly reconciling bank statements and securing physical checks are crucial steps in preventing this type of fraud. Investing in high-security checks with multiple safeguards such as watermarks and ink technology makes it more difficult for fraud to occur.
Expense Reimbursement Schemes: These can go beyond inflated claims; they may include consistent over-reporting of expenses or claiming personal expenses as business ones. Clear expense policies and random audits of expense reports can help detect patterns of abuse.
Kickback Schemes: Kickback schemes are intricate and can involve long-standing agreements that disrupt procurement, leading to financial losses, reduced vendor quality, and inflated costs. It’s essential to train employees to recognize and report unethical behavior.
Vendor Frauds: Be vigilant about more complex vendor frauds. These can include schemes where vendors overcharge for products or services or provide substandard goods at inflated prices. Regularly reviewing and comparing vendor charges against market rates can help identify these discrepancies.
Internal Collusion Fraud: Pay attention to potential internal collusion, where employees might conspire with vendors or create phantom vendors. Implementing segregation of duties and regular internal audits can help uncover such collusive activities.
Accounts Payable Fraud Red Flags
Effective fraud prevention requires a keen eye for details that seem out of place. Recognizing these warning signs is essential for prompt detection and action.
Suspicious Invoice Characteristics
Personal Employee Information: Invoices that list personal details such as home addresses or personal bank accounts of employees could be a sign of embezzlement.
Incomplete Invoices: A lack of detail or blank sections on invoices might suggest they’re not legitimate. Watch for discrepancies in quantities or prices and duplicate billings. Implementing a robust PO Matching system, where each invoice is checked against its corresponding purchase order, can help detect and prevent this type of fraud.
Even Figures: Invoices with unusually even numbers, like $1,000.00, should be double-checked as they may indicate fabricated transactions.
Non-itemized Invoices: A failure to itemize services or products can lead to ambiguity and potential overbilling.
Vendor Management: Carefully scrutinize new vendors during procurement and regularly update your qualified vendor list. This helps ensure you work with legitimate, reliable vendors and reduces the risk of fraudulent activities. Requesting a W-9 form for each vendor is part of validating legitimate vendors.
Vendor List Auditing
Reviewing your vendor lists and seeking unusual patterns in behavior helps to deter deceptive financial activities, secure confidential data, and uphold business efficiency and legal standards.
Quick Contract Acquisition: New vendors that secure sizeable contracts quickly with caution; internal collusion could be involved.
Inconsistent Invoice Data: Always check that invoice information matches the details on your master vendor list to identify potential fraudulent activities.
Regular Vendor List Updates: Keeping your vendor list current, including removing duplicates or inactive vendors, is essential to prevent fraud.
Restricted Vendor List Access: Ensure that only authorized personnel can make changes or add new vendors to protect against unauthorized alterations.
Monitoring Employee Actions
It’s important to note that human behavior in and of itself is not a definitive sign of misconduct. Having strong oversight and controls in place also protects your employees against outside bad actors who may want to defraud the company. However, there are a few potential warning signs that you should pay attention to:
Employee-Vendor Relationships: An employee forming a close relationship with a vendor may indicate kickbacks or unethical behavior. Employees should disclose relationships with vendors who may be family members or other personal relationships.
Secretive Behavior: Employees who are secretive about contractual or invoicing details may be hiding fraudulent practices. Employees not taking vacation time or maintaining that they are the only ones to perform certain transactions or interactions with a vendor.
Significant Lifestyle Changes: Employees exhibiting a sudden and unexplained increase in personal spending could be living beyond their means, possibly due to fraudulent gains.
Heeding External Feedback
Listen carefully to what your vendors and employees are telling you:
Vendors Reporting Issues: When vendors complain about late payments or discrepancies between transactions and records, it could indicate internal process failures or tampering.
Notices of Invoicing Changes: Be alert to any changes in invoicing procedures that vendors report, especially those made without proper justification.
Vendor Concerns: Pay attention to any feedback from vendors about abnormal interactions with your company, as this could indicate issues that need to be addressed internally.
Best Practices for Fraud Prevention
Ensuring the integrity of accounts payable is key to a company’s financial health. Adopting effective measures can mitigate risks associated with deceptive practices.
Verification Processes: Establish a robust verification process for every invoice, cross-checking vendor information, billed amounts, and purchase orders to prevent illegitimate invoices.
Audits and Reviews: Periodic and surprise audits are vital for uncovering irregular patterns and inconsistencies that could indicate unethical activities. Having these performed by a third-party accounting firm adds another layer of protection.
Technological Monitoring: Using automation tools helps identify unusual transactions. This provides continuous vigilance and improves operational efficiency.
Vendor Management: Keep vendor records accurate and up-to-date, and ensure thorough vetting, regular performance reviews, and proper documentation maintenance to prevent fraudulent activities.
Incorporate Fraud Prevention Into Your Hiring Process: Be proactive by thoroughly vetting candidates. This should include comprehensive background checks by a reputable third party to uncover any previous instances of fraud or related criminal activity.
Set Policies for Structured Interviews and Reference Checks: Use structured interviews to better evaluate candidates’ ethical decision-making. This involves asking pointed questions to determine how they might handle potentially fraudulent situations. When checking references that the applicant either provides or that you specifically request from their resume asking if the applicant is eligible for rehire can be telling.
Emphasize the Importance of Fraud Prevention During Onboarding: New hires should know the company’s zero-tolerance policy towards fraud and have it outlined in your employee handbook. This helps them understand the consequences and the importance of adhering to company policies.
Regular Awareness and Recognition Training: Equip your team with the knowledge to spot and appropriately respond to signs of fraudulent activity. Training should be ongoing to address new and evolving fraud tactics.
Conduct Credit Checks for Key Financial Roles: To further mitigate risk, perform credit checks for those in financially sensitive positions. This can reveal financial pressures that may increase the temptation to commit fraud.
Continual Improvement of Internal Controls: Regularly review and update internal controls to close any gaps that could be exploited for fraud. This includes segregation of duties, transaction monitoring, and approval processes.
Encourage a Whistleblower Policy: Create an environment where employees feel safe to report suspicious activity. This can often be the first line of defense in uncovering fraud.
Benefits of Outsourcing AP Automation
Outsourcing accounts payable (AP) to a 3rd party like ILM Corp bolsters the security of financial transactions. We operate free from client and vendor connections and follow strict processing specifications. This approach sets a manipulation-resistant workflow. Any invoice that deviates from these standards becomes obvious and is subject to immediate scrutiny.
ILM’s digital mailroom service provides security, efficiency, and accuracy in managing accounts payable. Attention to detail is paramount in every invoice handled. Quantities and prices of each line item are thoroughly checked to ensure correct math and can be validated against your purchase order.
This process guarantees the total amount paid to vendors is accurate. Such precision often surpasses what in-house accounting departments achieve, where individual clerks usually manage these tasks. This method elevates the accuracy level of accounts payable management.
Fraud Reduction through Advanced Automation
ILM’s approach to AP automation involves using AI and Optical Character Recognition (OCR) technology for precise invoice processing. This advanced technology enhances accuracy in scanning invoices and facilitates purchase order matching. It ensures that every detail is accurately captured and cross-referenced to reduce the risk of processing fraudulent invoices.
Efficient and Secure Invoice Processing
ILM’s automated systems make invoice processing both efficient and secure. It reduces manual data entry and exception handling, saving time. AP automation is tailored to meet your company’s security and operational needs. This tailored approach is key in fraud prevention, allowing the implementation of controls and measures that are best suited for your business.
Commitment to High Standards and Security
ILM’s adherence to high-quality standards and security protocols contributes significantly to fraud prevention. Our commitment to maintaining ISO 9001:2015 certification and conducting Annual SOC 2 Type II audits shows our focus on security and reliability. Ensuring HIPAA compliance is also a key part of our operations.
Let ILM Help You Combat AP Fraud
At ILM, we understand the importance of protecting your business against accounts payable fraud. Our digital mailroom service offers a secure, accurate, and efficient way to manage your AP processes. We ensure that every invoice is scrutinized for accuracy, from line item quantities to unit prices, providing a level of precision and security that is challenging to achieve in-house.
Click below to learn more about our AP outsourcing services.
